New York Court Departs From Long Standing "No-Prejudice" Standard for Insurer to Support a Late Notice Defense
December, 2004
by Steven J. Fried and Robert A. Stern
As long as most New York attorneys can remember, New York has always followed the rule of law that an insurer does not need to show “prejudice” in order to support a late notice defense. Last month, in Great Canal Realty Corp. v. Seneca Insurance Company, 2004 WL 2952794 (1st Dep’t 2004), the First Department held that a primary insurer must prove “prejudice” in order to rely upon a late notice defense. What has happened over the last few years to cause New York Courts to move away from this rule of law? Have insurance contracts become too close to an iron clad adhesion contract? Increased insurance premiums? Too much litigation? Are Judges realizing that they are insureds, too? What has caused New York’s First Appellate Department to not only reject New York’s long established rule of law, but to rely upon Oliver Wendell Holmes’ The Common Law, published in 1923, and Justice Cardozo’s statements from the same era, to justify its rejection of the “no-prejudice” standard in New York.
In Unigard v. North River, 79 N.Y.2d 576, 584 N.Y.S.2d 290, 594 N.E.2d 571 (1992) (Mr. Stern was one of the attorneys involved in this precedent setting case), the New York Court of Appeals (New York’s Highest Court) held that a reinsurer can only rely upon a late notice defense if it is able to prove that it was “prejudiced.” However, the Court of Appeals did not alter in any way, shape or form New York’s rule that a primary insurer does not need to prove “prejudice” in order to rely upon a late notice defense. From 1992 through 2002, New York courts, at all levels, have continued to face litigation regarding the late notice defense. The courts have uniformly held that if an insured can establish that its notice was provided within a “reasonable” time period under all the facts and circumstances, then there is no basis for a late notice defense. In fact, the First Department itself has held in a number of cases, where notice ranged from a few months up to three years, that the late notice defense was inapplicable - - the timing of the insured’s notice was “reasonable” under the circumstances then and there existing.
In Brandon v. Nationwide, 97 N.Y.2d 491, 743 N.Y.S.2d 53, 769 N.E.2d 810 (2002), the Court of Appeals began its first major departure from the “no-prejudice” standard for primary insurers. The Court of Appeals held that “the no-prejudice exception should not apply to disclaimers of late service of legal papers.” The Court of Appeals “noted three public policy concerns that are implicated: the adhesive nature of insurance contracts, the public policy objective of compensating tort victims, and the inequity of the insurer’s receiving a windfall due to a technicality.”
The Court of Appeals recognized in Unigard and Brandon that New York’s “no-prejudice” standard was not only in the minority of jurisdictions, but an exception to well established principles of contract law. However, the Court of Appeals did not state that it was prepared to overrule the long standing New York principle that a primary carrier does not need to prove “prejudice” in order to support a late notice defense (except in the late service of legal papers).
In Great Canal, on May 7, 2002, an employee of an air conditioning subcontractor fell off a ladder at his work place, which Premises was owned by Great Canal. A few weeks later, the General Contractor’s foreman advised Great Canal’s President of the accident, in very general terms, and stated that the General Contractor’s insurance will take care of any problem, since Great Canal is an additional insured. No discussion took place regarding the exact nature of the accident or extent of the injuries.
On August 14, 2002, the injured employee commenced an action against Great Canal, for $5 million. In September, 2002, Great Canal was served with the Summons and Complaint. On September 10, 2002, Great Canal notified its liability carrier, Senaca Insurance Company, of the lawsuit. Senaca disclaimed coverage relying upon a late notice defense. On January 6, 2003, Great Canal commenced its declaratory judgment action against Senaca. Senaca moved for summary judgment, which was denied by the trial court. The trial court held that “triable issues of fact exist as to whether Great Canal had a valid excuse for the delay in notice, given the information provided to [its President].”
On December 21, 2004, the First Department affirmed the denial of summary judgment, but, unfortunately, for the insurance industry, did so for a much different reason. The First Department stated:
Our concern in the instant case, where the time lapse between injury and notice was just four months, prompts us to examine the inequities inherent in granting insurers the benefit of a conclusive presumption of prejudice in derogation of fundamental principles of the law of contracts. Initially, we need not look much further than the antipathy demonstrated by the Court of Appeals in characterizing the “no-prejudice” exception as one that “allow[s] insurers to avoid their obligations to premium-paying clients.” In particular, the Brandon Court appeared to applaud two jurisdictions, Colorado and Tennessee, that had recently moved to a prejudice standard after acknowledging that the true inequity of a presumption of prejudice lies in the “severity of forfeiting one’s insurance benefits based on the technical violation of a notice provision.”
In acknowledging the draconian character of forfeiture, jurisdictions moving to a prejudice standard have generally agreed that the condition of timely notice “should not be given greater scope than required to fulfill its purpose.” In other words, since notice requirements are designed to protect the insurer from prejudice, “[i]n the absence of prejudice, regardless of the reasons for the delayed notice, there is no justification for excusing the insurer from its obligations.”
Great Canal, at 4 (citations omitted). The First Department noted that Great Canal was paying more than $25,000.00 in annual premiums to Senaca, and there was no suggestion that all premiums had not been paid. Since New York has a “no-prejudice” standard, “[t]o adopt a currently, much-quoted phrase, Senaca may well have disclaimed coverage just ‘because it could.’ Such inequitable arbitrariness is particularly evident in a handful of cases where insurers have disclaimed coverage, and courts in New York have upheld the disclaimers, for delays defined in terms of days rather than months.” Id. at 5 (citations omitted).
The First Department then stated: “[T]he time has come for this Court to look at, ‘the end which ought to be attained’ and acknowledge that freedom of contract is a fiction when applied to insurance policies.” Id. The First Department observed and agreed with other jurisdictions that an insurance policy “is not a negotiated instrument; rather its conditions are by and large dictated by the insurance company to the insured.” Id.
The “no-prejudice” rule required the insured to prove that its notice was “reasonably” timely under the circumstances; there is no clear definition of “reasonable” or “timeliness.” An insurance policy’s incorporation of the phrase “as soon as practicable” provides no guidance or parameters, and does not mean that failure to do so will result in automatic forfeiture. The First Department noted that a “no-prejudice” standard “violates the established principle of contract law that ‘contractual duty ordinarily will not be construed as a condition precedent absent clear language showing that the parties intended to make it a condition’.” Id.
Based upon all the above, and additional arguments set forth in its decision, the First Department concluded as follows:
Ultimately, we see no reason to extend the “no-prejudice” exception to allow insurers to disclaim coverage on the basis of late notice of claim where “lateness” is an arbitrary temporal standard applied to a lapse between occurrence and notice, and where contractual rights favor just one party, the insurer. In any event, in jurisdictions which have struck down the no-prejudice exception the insurer may still prevail by demonstrating it was prejudiced by the late notice.
Thus, we would affirm denial of summary judgment on the ground that a triable issue of fact exists as to whether Senaca was prejudiced by Great Canal’s notice four months after the date of the injury in the underlying action.
Id. at 7.
Learning Point:
Assuming a carrier’s case is within the First Department (New York or Bronx Counties), its only available means of disclaiming coverage on late notice of an occurrence is to prove that it was “prejudiced” by the late notice. If “prejudice” is established, then the burden shifts to the insured to prove that the timing of its notice was justified by one of the exceptions to the “prejudice” standard, or some other exception to the “prejudice” standard.
Assuming a carrier’s case is not within the First Department (there are Four Appellate Departments in New York), then, at present, the carriers do not need to prove “prejudice.” The carriers can disclaim coverage on late notice of an occurrence if they can show that the notice was not given in a timely manner (as stated above, in a few cases, just a few days have been held untimely). The burden of proof then shifts to the insured to establish that its notice was given in a reasonably timely manner under the circumstances then and there existing. Assuming Senaca appeals the First Department’s Decision to the Court of Appeals and the matter is taken through that Court, then within the next few years it is very possible that the insurance industry will definitively know whether a primary carrier must prove “prejudice” in order to benefit from a late notice defense in New York. Mr. Stern wishes to thank his Partner, Steven J. Fried, for his input and assistance with this article. •
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